How to rent out your house
When a rental property lands in your lap, should you hold or fold? Outsource the management or do it yourself? Are you ready for the tenants, toilets and trash?
It doesn't take much to turn an ordinary homeowner into a landlord. Maybe you have to move but want to keep your home and rent it out. Or you have a change of fortune -- you get married, receive an inheritance or buy a new house before you unload the old one.
While many people would love to have an extra house to worry about, owning even one rental property can be a headache. You have to tease the problem apart and ask yourself, among other things:
- Is it worth hanging onto this property?
- How will you feel about strangers moving into your beloved home?
- Can you, a novice with a day job, turn a dime on a real-estate rental while avoiding the Tenants from Hell?
The answer to these questions depends partly on the place itself. Ideally, it's in good repair, in a safe part of town and the mortgage is cheap or paid off. The more your place departs from this ideal, the more closely you should look at selling if you can. That's because, whatever your reason for holding and renting out a spare house -- and there are many -- it won't work if you don't treat it like a business.
Can you do it? Should you?
The biggest criterion for whether you should even attempt this may be whether your temperament is suited to being a landlord. "You first have to look yourself in the mirror and ask if you have the time and the skill set to do this properly," says Robert S. Griswold, who owns Griswold Real Estate Management in San Diego and writes the nationally syndicated "Rental Forum" column for InmanNews. Griswold also wrote "Property Management for Dummies."
Landlords' tales of nightmare tenants
In addition to your obligation to yourself to keep the business afloat, your landlord responsibilities include:
- Providing a safe, smoothly functioning home for your tenants. That means, for example, making sure plumbing, wiring and appliances function, outdoor areas and stairways are safe. It means quickly responding to a tenant's report of the inevitable malfunction or problem.
- Advertising the rental, selecting tenants and evicting them if you must -- all of which are governed by law.
If you can't see yourself performing these roles, it doesn't mean you can't pursue your rental plans; you just might be one of the people for whom it's worth paying a professional property-management service. In fact, if you are out of town, consider the decision made; you simply must be on site to manage a rental. But first, you need to do some basic math:
- Calculate your "nut." That's the total cost of keeping the place going, including mortgage payments, utilities, maintenance, yardwork, repairs and any professional services you'll need, which could include property management, tax help and a legal consultant. If you're renting out your primary residence, you'll also have to decide whether to rent it furnished or unfurnished. If you leave furniture, be prepared for it to be damaged or, at the minimum, show some wear. Any personal effects, electronics, fragile items and anything else you care about should go in locked storage, either on-site or at a paid storage facility.
- Estimate your rent price. A competitive rent price reflects prevailing rates, so simply adding up your cost of ownership won't do. Check newspaper ads, call property management agencies and look at online classified ads such as Craigslist.org or Realtor.com's Move.com to assess the price range for similar units in your locale. Visit a few to hone your research.
- Compare the rent you think you can get with your costs. Casey Edwards, co-author of "The Complete Idiot's Guide to Being a Smart Landlord" and "The Complete Idiot's Guide to Making Money with Rental Properties," suggests working up two profit-and-loss statements: a best-case list and a more conservative one that includes all the things that could go wrong. (Learn more about P&Ls at SCORE, a nonprofit that offers free advice for small businesses.) Even if the plan doesn't pencil out, there may be good reasons for hanging onto a rental that doesn't turn an immediate profit. Among them: tax-sheltered depreciation; the chance of a profit if property values appreciate; the need to hold a home for a family member to use later; the prospect of a worse loss incurred by selling immediately; or the simple desire to add to the value of your estate.
Three tricky areas: Screening, the law and maintenance
If you're considering managing your property yourself, take into account how you'll handle these three demanding jobs:
Screening: Tenant screening is perhaps a landlord's most crucial task. You may think your gut is your best ally for this job, but there are two important reasons this isn't a good idea:
- It doesn't work.
- It's not legal.
"If you think you are a good judge of character, stay out of this business," says Edwards. "I run a full-time rental office. People come through my door, they can look fantastic. And (then) I do the credit check and I am surprised at the credit issues, at the criminal record. To find the perfect person is very rare, I think. Everyone has credit issues these days."
15 common renter's rights
The Internet is full of data brokers -- companies promising to perform credit checks or criminal-records searches. But this is an unregulated area, and the accuracy of these big databases is not good, says Lillie Coney, associate director of the Electronic Privacy Information Center in Washington, D.C. Lawsuits have been filed by tenants claiming to have been denied housing because of inaccurate data-broker assessments. Landlords who use these screeners also are legally liable under fair-housing laws, Coney says. (See OhMyApartment for a discussion of tenant blacklisting.)
Coney says a small landlord can get good results, instead, with an application form crafted with the help of a fair-housing attorney and diligently checking each and every reference and piece of information.
Your rental application should elicit an applicant's full identity, rental history and credit picture. If you are going to perform a credit check, disclose that on the application and ask applicants to sign a release agreeing to this. (You can find free examples of rental applications online. Western Michigan University's student affairs site offers a boilerplate tenant application, while Legaldocs.com offers a free tenant application with a background check consent area.)
Edwards offers additional tips:
- Match the names of a tenant's previous landlords against assessors' records associated with the address. If they don't match, there may be a good reason. But make sure an applicant is not using a friend to pose as the former landlord for purposes of a recommendation.
- Don't settle for checking with the applicant's last landlord -- call at least two addresses back, since a current landlord might want to get rid of a difficult tenant. Earlier landlords feel no such constraint.
- To learn more about screening tenants, contact the National Apartment Association and see two sites aimed at landlords, MrLandlord and Rental Housing Online, which also offers a screening service.
The law: Landlord-tenant laws vary from state to state. Some states tilt toward landlords, others -- California, notably -- toward tenants rights. Some municipalities have requirements, too, and federal law governs things like fair treatment for tenants and Americans with Disabilities Act requirements. Among the legal considerations:
- The law requires you treat everyone equally, so set your criteria for accepting or rejecting applicants and apply them uniformly. Write down your policy. What problems will count against a prospective tenant in your mind? What things can you overlook? How will you consider tenants with a history of debt? Stick to your rules without exceptions.
- If you do reject someone on the basis of information you get from a screening service or data broker, be transparent -- disclose to the applicant exactly what the problem was and how you learned of it, Coney says.
- Keep applications for several years so you can demonstrate, if necessary, that you have a policy for screening applicants and that you apply it fairly. When you discard old applications, shred them -- especially those with Social Security numbers and other personal information.
- Your state may require you to pay interest on renters' security deposits.
You can learn more about a landlord's legal obligations at this Cornell Law School site (including state statutes and federal laws) and from Nolo Press' "Every Landlord's Legal Guide" as well as from Edwards' and Griswold's books. You'll still need to find a local attorney who specializes in landlord-tenant issues representing landlords (not tenants) to be your consultant. When you find yourself over your head, shell out a few bucks to ensure you are complying with the law.
Maintenance: As for property maintenance, if you are handy, go for it. Just remember that there will come a time when you'll hit a problem you can't solve. You'll also likely want to take a vacation at some point and will need emergency resources your tenants can contact. Today, before you need it, establish a relationship with a plumber, an electrician and a carpenter whom you can trust to jump in at a moment's notice. If you aren't handy, you'll want to be extremely nice to these people, since you will definitely need them some day.
If you raise your rents to keep up with the market, use three months' worth of the increase and put it into the property, suggests Griswold. "The No. 1 complaint that tenants have about landlords is that they raise the rent but don't put anything back into the property," he says.
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